The Impact of Post-Enron Information Disclosure Requirements Imposed Under U.S. Law on Foreign Investors

The recent revelations of unprecedented corporate fraud in companies such as Enron and WorldCom were like a virus that ate at the heart of the integrity of the U.S. financial market. Through the Sarbanes-Oxley Act (the “Act”), Congress made a good faith effort to restore confidence in the U.S. financial market by applying the usual remedies for corporate fraud–an increased level of disclosure and harsher penalties for non-compliance. Although the Act’s provisions may be, on the whole, beneficial to U.S. investors and the U.S. public, it is a bitter pill for foreign investors. This is because Congress deviated from the traditional mutual recognition approach, which permits foreign investors to satisfy regulations through compliance with equivalent corporate governance standards of their home countries. Instead, the Act uses a unilateralist approach that compels foreign companies to abide by the same rigorous disclosure requirements as U.S. companies. As a result, the Act imposes duplicative and costly governance reforms on foreign issuers that are listed on U.S. stock exchanges and is tantamount to an unintended tax on foreign corporations. While the consequences of Congress’ unilateralist approach may be costly, the solution is simple; Congress need only amend the Act and adopt a mutual recognition approach.